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3M, GE Prove the Rule: Analyst's Toolkit

3M, Caterpillar and GE, America's premier blue chips, look for opportunity elsewhere.

ST. PAUL, Minn. (TheStreet) -- 3M (MMM) - Get 3M Company Report, following Caterpillar (CAT) - Get Caterpillar Inc. Report, General Electric (GE) - Get General Electric Company Report and Intel (INTC) - Get Intel Corporation Report, illustrated the benefits of international diversification in its first-quarter earnings report yesterday.

3M said emerging markets accounted for the strongest performance for the three-month period. The company's Post-It notes are used widely in offices not only across America, but also in countries including Belarus, Trinidad and Guam.

Elsewhere, Caterpillar Chief Executive Officer Jim Owens said Monday that "economic conditions are definitely improving, particularly in the world's developing economies" and orders are at record levels in some countries. In addition, GE now gets more than half of its revenue from outside the U.S., and CEO Jeffrey Immelt has boosted the research budget as competition intensifies. And Intel's 2010 gross margins will widen to a record, and net income soared almost fourfold in the first quarter, the chipmaker said two weeks ago.

3M posted a profit of $930 million in the first quarter, with earnings per share of $1.29 versus expectations of earnings of $1.21. Analysts also underestimated revenue by almost half a billion dollars.

Big companies with a broad range of products tend to mimic the stock market's performance. That's the case with 3M, though not in recent years. The

S&P 500 Index

outperformed 3M during the technology and credit bubbles. Still, 3M is up 13% since the beginning of 2008, while the S&P 500 Index is down 46%. Over the past year, 3M has gained 60%, almost double the benchmark's 37% gain.

3M has avoided bubbles by sticking to bread-and-butter products including tape, aerosol, cable accessories, health-care kits -- you name it. That has led to sometimes sleepy performance, but the strategy has paid off. 3M has diversified its product line and, more importantly, its international exposure. In doing so, the company stayed ahead of the economy as a whole, since risks were spread among a number of countries, including those that kept growing or slowed only somewhat while the U.S. fell into a deep recession.

About 37% of 3M's revenue comes from the U.S., less than that of GE and most other American-based blue chips. Focusing on emerging markets has helped 3M gain solid profitability, while less diversified companies have struggled.

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3M has six main units, each of which accounts for 11% to 31% of sales. This even spread creates an environment in which the company isn't beholden to one single industry to sustain performance.

Unlike GE, 3M isn't exposed to finance, which drove profits during the credit bubble and put companies out of business in the bust. General Electric is furiously shrinking its finance arm after billions of dollars of losses, which forced America's premier industrial company to cut its dividend and seek funding to maintain adequate capital levels. It's been an embarrassing tenure for CEO Immelt.

3M has a beta value of only 0.8, meaning it's less volatile than the stock market. That puts investors at less risk of suffering big losses, but they'll also miss out on big gains. That's the sort of tradeoff that investors should accept to protect their portfolios' value during times of great volatility. 3M's returns are likely to stay consistent even in times of turmoil, allowing for a hedge against adverse market movements.

With a dividend yield of 2.5%, parking cash in 3M is far more efficient that most alternatives, plus it gives investors the possibility of stock-price appreciation.

3M's operations resulted in a return on equity of 28% and, although debt makes up more than half of its capital structure, it financing costs are minuscule. An interest coverage ratio of 27 shows that the company can more than afford its current leverage level and it's not taking on any sort of major risk by using that structure.

International diversification is helping industrial companies move even while growth is only just starting to pick up at home. Consider 3M for its solid diversification.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.